Cryptocurrency funds: do you need this investment scheme?

4 July 2018

Trust management of money on behalf of a group of investors with a view to collect together small amounts to form a more remarkable money pool is something painfully familiar for individuals seeking to participate in investment markets with smaller sums. Cryptocurrency funds may become one of the right destinations for these people.

General idea

In a nutshell, a cryptocurrency funds represents an investment program, where small investors may bring their moderate amounts for getting access to large-scale cryptocurrency asset trades, managed on their behalf by trading specialists. The strategies of such funds may vary from one fund to another and depend on the decisions made by the fund managers.

Cryptocurrency funds may include hedge funds and publicly-traded funds and may be dealing either with only one cryptocurrency, such as Ether, or with several cryptocurrencies. These funds may practice ‘buy and hold’ models of long-term trades, or may be focused on short-term changes in the market prices. Managers of such funds make their profit from charging some fee for their work out of the overall income brought by the trading operations.

Classes of funds

Publicly-traded funds. That kind of funds, in general, operate on public exchanges with the ‘buy and hold’ scheme being their key strategy for trading. In some cases such funds prefer to focus on one cryptocurrency only, while other platforms deal with a number of major cryptocurrencies featuring large market capitalization. The fee charged by the managers of these funds may account for 1 to 2.5%.

Private funds. Unlike public funds, private ones have no listings on public exchanges, meaning that they are not strictly regulated. Moreover, their qualifications may be too high for minor individual investors, as the acceptance threshold amounts to $50 thousand. These funds also adopt mostly ‘buy and hold’ trading strategy. Managers of such funds take an annual fee from investors.

Hedge funds. In case of cryptocurrency hedge funds, they operate in a different manner, using complex investment practices with an ultimate goal to make returns on playing in bullish and bearish markets. These funds may seek for benefit in arbitrate transactions, participate in leverage trading and adopt other sophisticated approaches.

What should be kept in mind?

In order to start investing into cryptocurrency funds, beginners are recommended to consider the following aspects:

General approach. Beginners need to learn more about the fund’s strategy and priorities, goals and tools used to achieve them. It is advised to learn more about the ultimate objective of the fund and implicated risks. An investor needs to pay attention to the selected cryptocurrencies and return period. Finally, investors are advised to look at the type of analysis used by the funds: technical, fundamental or other. How the fund determines which cryptocurrencies they will be trading.

Fee structure. The fee size is a very important aspect of investment into the crypto funds, therefore investors need to learn about it in advance. How much do managers charge and what kind of fees they apply to entry and exit? How much do they charge for outperforming the benchmark?

Team. Investors need to carefully read the information about the team behind the cryptocurrency fund, learning more about their experience and qualifications.

Score. Background and history of previous transactions should also be taken into account, when choosing a cryptocurrency fund. The importance of the background information, however, should not be overestimated, as it is not an indicator of the future success.

Risks

Investment into cryptocurrency funds is associated with risks and losses, just like any other investment scheme. Beginners should weigh all risks beforehand to be ready for force-majeure events.

  1. No direct control. Investors transferring their funds to the trusted management for making investment on their behalf voluntarily wave their ability to control the whole process, because, as we have already mentioned, above managers take their own decisions during the trade.
  2. Market volatility. It should always be borne in mind that the cryptocurrency market is a volatile environment, as prices may sharply go up and down. Investors looking for more stable instruments would better find something else.
  3. Overestimating the previous success. Investors should not rely too much on the reputation of the cryptocurrency fund, because their previous success may not be repeatable. It is related to the unpredictability of the cryptocurrency market, as not every cryptocurrency may follow the success path of Bitcoin.

4. Taxation. Investors need to understand that in some jurisdictions giving their money with a view to derive a profit in future may be subject to taxation under the applicable laws.

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